Fix Social (in)Security

The federal governments recent dip into the Social Security
surplus has refueled the anxiety many feel over their financial future.
The following is an excerpt from remarks delivered by Wharton Professor
Olivia Mitchell, a member of President Bushs Commission to Strengthen
Social Security, to her fellow commissioners July 19.

Mitchell is International Foundation of Employee Benefit Plans Professor
of Insurance and Risk Management.

The U.S. Social Security system is not in danger of running out of money
today. Nevertheless, our Old-Age and Survivors Insurance (OASI) system
faces financial shortfalls that advance action can do much to alleviate.
Annual Social Security payroll tax revenues will soon be inadequate to
pay currently promised benefits. Though the Social Security Administration
can claim the federal governments IOUs to pay money borrowed from
it, known as Trust Fund assets, redeeming these IOUs requires financing
from somewhere. And as we know, when the government gets financing from
somewhere, this means us and our children.

Give workers control

Soon, new tax revenue will have to be devoted to the program, government
expenditures will have to be cut, or new debt must be issued.

Experience shows that giving the surplus to the government results in
more government spending, and conversely, I believe, giving control to
workers will result in less political risk that the government will spend
the Trust Fund assets.

Reforming the system now is needed to enhance economic security.

Some claim that todays system is progressive because it provides
a higher percentage benefit to low as compared to high earners. There
are a couple of problems with this conclusion. One is that it focuses
only on benefits while ignoring taxes. About one-third of older married
women today expect no extra benefit even when they work and contribute
to the system late in life. Further, future increases in womens
market attachment will not improve many womens benefits, despite
their paying more Social Security taxes. Additionally, divorce rates peak
after about seven years of marriage, but under current rules benefits
are not available to former wives unless they remain married 10 years.

Poverty remains

The lack of a minimum poverty guarantee in our OASI program also does
nothing to ensure that people are protected from poverty in old age. For
many, the net benefit from Social Security due to additional work is and
will remain negative after taking account of the Social Security payroll
tax these workers pay while employed.

OASI rules today leave many people uncovered, ineligible, paying but getting
little or nothing at the margin, and sometimes poor.

I believe we should do better, and ownership of a personal saving account
can play a role in this improvement. A personal account can give workers
a stake in some additional benefit if they contribute more, which many
people today do not perceive.

The current OASI system also requires people to pay taxes over a lifetime,
but the asset cannot be passed on if people die young. According to a
recent study, a 22-year-old man today has one chance in five of dying
before his normal retirement age. He would receive no old-age benefit
despite a lifetime of contributions. And some people are even more vulnerable.
For example, African-American men have one chance in three of dying young.
If they are uneducated, this risk increases to 41 percent, or two out
of five. An individual account program would permit people to leave some
of their contributions and interest as a bequest to their heirs.

Some propose raising taxes to keep the system going, or boosting the return
credited to Social Security Trust Fund, which boils down to the same thing,
raising taxes. Members of the Presidents Social Security commission
believe that increasing taxes to keep a current troubled system in place
will not solve the problem. They also believe that individual accounts
can bring about real increases in retirement saving while reducing political
risk and enabling people to diversify their investments.

Penn Current Express

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